Cost disease in the arts: what does it mean?

Professor William Baumol, one of the greatest living economists, has died at the age of 95. Alan Krueger did an interview with him here, and Tyler Cowen has written often about him, here.

Readers of artsjournal.com know him best for his conception of cost disease, done jointly with William Bowen. Here is a nice concise presentation from 1965. In a nutshell, there is the idea that wages in the live performing arts will be pressed ever upwards even though there are few labor-saving technologies available to arts organizations to keep costs in check. Let’s expand on that a bit, and ask what it means for arts policy.

Different sectors of the economy have different rates at which the quantity of product per worker-hour increases over time. In manufacturing, agriculture, and transportation, for example, the output per worker-hour has increased enormously over the past century. But other sectors have less access to labor-saving technology, where there are few ways to reduce the worker-hours required to get the job done. In general, these are jobs that require face-to-face contact: barbers, masseuses, cab drivers, primary school teachers, as well as many workers in the health professions and social services, have to meet with clients and need a certain amount of time to get the job done. Note I am talking about a very particular kind of technological change, namely labor-saving technology in production. I’m saying nothing about technology changes that influence the quality of product. we’ve learned a lot about how to teach eight-year olds more effectively, how to counsel those in need, even how to give a better massage. But there aren’t many ways to save time in doing these services. Across the whole economy, wages tend to rise in tandem with the average rate of productivity growth. But that means that where labor-saving technology has been rapidly increasing, costs will fall, since wages are not rising at the same rate as productivity. Conversely, where labor-saving technology growth has been slow, costs will tend to rise, since wages are rising faster than productivity. And that’s how Baumol defined cost disease. It’s a funny term, since it is not really a sickness at all; it only happens because the economy is getting, on the whole, richer (if there were no productivity growth at all, there would be no cost disease). But tell that to a manager trying to balance the books while labor costs keep rising.

One big implication is for the public sector. Most of what it does is in cost disease territory – education, health care, social services, the justice system. That means that trying to finance services at constant (or decreasing) tax rates is going to be an enormous challenge. Health care costs are always going to be under cost pressure, and it’s not entirely due to new machines or expensive pharmaceuticals – most of it is salaries for nurses, doctors and various technicians and other staff. Education is always going to be under cost pressure; trying to maintain teachers’ wages at a constant rate when wages throughout the rest of the economy are rising will only mean fewer and fewer talented people wanting to enter into a career in education (as some parts of the world are coming to learn).

But let’s now look to the arts. Live music, theatre, dance don’t offer a lot of opportunities for labor-saving technology. Some aspects of it do – performers and their audiences benefit from the significantly lower travel costs than used to exist. And what technologies have brought into at-home entertainment is stunning. But local live performance will be under pressure. When I was a high school student we had four or five dances a year where (good!) live bands were hired. Cost disease has made that prohibitively expensive for many schools, and so the rise of the dj.

What’s the policy implication? I would argue that cost disease is not in itself an argument for public subsidy. Nobody suggests that we need to subsidize barbers or plumbers simply because they are in a cost disease situation. They have to deal with it by increasing prices and providing services that people will continue to want to buy. We don’t subsidize sectors simply because of changing productivity rates.

On the other hand, if there is some other reason for subsidizing the live performing arts – a public good aspect to them – then we could say “well, the rate of subsidy probably needs to rise over time, as costs will be rising”. Baumol assumed that public-good argument was sound, and so he brought cost disease into the picture of how to think about arts policy. But cost disease is not the primary force here.

William Baumol wrote extensively on all matters of economic policy, and was great at applying economic methods to important problems on economic growth, industrial structure, trade, and public policy. He continued to be an active scholar well into his later years, and leaves a lasting legacy for economics, and especially for those of us in the cultural economics world.